Saturday, August 30, 2014

The Importance Of Walking & Moving Throughout The Work Day

I am very fortunate that most days I work from home. Last year I worked for a large commercial real estate finance company which was my first ever "office" job. The long hours of sitting still were tough for me because I'm someone that generally likes to be moving and talking, but I also knew that it was unhealthy. Fortunately, I got into a rhythm of taking breaks and walking around the pond outside with my co-workers throughout the day, which I believe improved our overall performance. Moving also helps stimulate creativity; see How Taking A 20-Minute Walk Everyday Transformed My Approach To Work.

Sitting Is Killing You

Friday, August 29, 2014

S&P 2000 vs. Silver 19.50 - Which Is The Better 5 Year Bet?

I try to spend about 50 percent of my time studying the financial markets reading, listening or watching analysts and economists that are bullish. I try to spend the other 50 percent of my time within the bearish camp. I would recommend everyone try do this to avoid confirmation bias; one of the most difficult psychological emotions to avoid while investing.

As markets move through cycles people naturally move, like a force of gravity based on human psychology, toward the side the market is moving. As stocks move up bears cannot withstand it and move into the bullish camp. This happens for natural psychological reasons as I just mentioned but it also happens due to career risk. If a professional in the financial world finds himself away from the crowd, and he is wrong for any period of time, he is terminated (or his fund loses investors). The ocean of financial capital around the world has no patience for under performance for any length of time; especially when the world's most popular index (the S&P 500) is on fire.

Overall throughout my investing lifetime I have enjoyed decent gains in the financial markets by investing in what makes the most sense to me and not what makes the most sense to the crowd. I entered the silver market with tremendous force in late 2005 through late 2007. I bought some at $7 and some at $15, but averaged around $11 through the period. I still hold the position. I felt like a genius at $50 an ounce in April of 2011 for buying and holding, and I feel like an idiot today for not selling at the top because it's back down to $19.50. At these prices I'm once again accumulating the way I was during 2005 and 2007 (Here's why).

I liked Chinese stocks in September 2012 and I like agriculture and uranium stocks today (click the links for a discussion on each asset class). The Chinese purchase has worked out great and time will tell on the recent agriculture and uranium buys.

One area of the market that I have continued to avoid since late 2010 has been the United States stock market. This was a semi-bad move from late 2010 to 2011 and disastrous move from 2012 to today due to the U.S. market's vertical and explosive tear upward.

Has anything changed? No. I felt the market was overvalued in late 2010 and I feel that it is wildly overvalued today (Here's why). No one cares today about corn, wheat, uranium, or silver (which is great, I hope I can continue to accumulate for a long time), they are only focused on the darling U.S. equity market. 

It has become more and more difficult to find bearish views on the market to provide the "50% of my time" study. One of the best writers within the bearish camp is John Hussman. I think he provides a well thought-out argument for why the market should turn down in the (near) future. Like me, he has been (incorrectly) bearish on the U.S. market for years.

When we reach the tail end of a cyclical run the bulls move from patting themselves on the back to an all-out assault on anyone who is betting on a downturn. One of those assaults this week came from John Swedroe of who wrote; Why Care About What Hussman Forecasts?  He lays out a decimating analysis of Hussman's longer term fund returns (1% return vs. the market average 8% return).

When we reach the end of a market cycle these type of articles make a lot of sense to investors. They are what pushes those that have been on the sidelines (or partially on the sidelines) "all in." Another way to look at it would be to ask; what would the market average returns look like for Hussman's funds vs. the S&P 500 if we were sitting at the peak of the cycle and the market turns lower (Hussman has bets in place that profit or avoid losses in a market decline)?

The efficient market theory enters the lexicon when the market is roaring. "You should always stay with stocks for the long run." "Looking at the long term chart you can see that every dip should always be bought."

What if every dip should not be bought? What if we are sitting at a historical peak in U.S. financial markets; both bonds and stocks? What if the next 20% decline is bought by you, but it is not bought by everyone else, and the market moves another 40% lower? What if it takes 25 years to come back to our current (historically overvalued) peak, the way it did in 1929? Do you have another 25 years to continue buying the dip?

I'm not saying that this will occur or even that it is the most likely event to occur. However, based on current valuations of U.S. stocks and bonds it should certainly be in the realm of possibility (20%?). The following chart comes from Ray Dalio, arguably the most successful hedge fund manager in the world today. His team believes that the expected annual returns moving forward on U.S. stocks and bonds after adjusting for inflation is currently at the lowest point in history (1%):

A 1% return could come in a variety of ways. It could come from a 70% decline followed by large annual gains that average out to a 1% return over the next decade. It could come from the markets moving sideways for 10 years. Either way, doesn't it make you a little nervous that the smartest team of financial analysts in the world are anticipating the worst returns on U.S. assets in history?

I thought John Swedroe's hit piece on John Hussman was actually well written, until I reached the very end and he came over the top with this:

"One reason to do so is that he isn’t telling me, or you, anything that other sophisticated investors (such as pension plans, hedge funds and mutual funds) are unaware of. The market has already priced the risks on which Hussman bases his analysis. He just believes he’s smarter than the collective wisdom of the market. Or, at least, he wants you to believe he is, even if he knows better."

Oh no John, if you could have only stopped before you reached that paragraph. In reality, the market has priced in a world better than absolute perfection moving forward and when the market moves back to reality, I certainly hope Mr. Hussman saves that sentence.

In the meantime, S&P 2000......2500.......3000......Great.

I'll just be buying agriculture, uranium stocks, silver, foreign bonds, Chinese water companies, Russian oil companies and all the other things that the world either hates or does not know exist. I do not manage money so I have no risk of losing "assets under management." I do not work in the financial industry so I have no career risk. I'm just a normal business owner who loves the financial markets.

Hussman and I will check back in with everyone else in a few years to see if sanity has returned. If it hasn't, we'll keep buying the stuff people hate and shorting the stuff people love.

Deaths From Police Shootings: America vs. Other Developed Countries

A major news event in the United States a few weeks ago was the shooting of Michael Brown by a police officer in Ferguson, Missouri. The incident has sparked outrage across the country on the use of police force and racism (as well as ongoing rioting in the town of Ferguson).

I do not pay enough attention to news events like this to have any opinion on the matter, but I came across the following infographic this week which I thought was shocking.

Thursday, August 28, 2014

How Far Away Is The U.S. Government Debt Crisis?

First, the consensus view:

Sounds great right?

The video above makes it appear that we are once again back at the point where the U.S. Federal debt is not a problem in the near term (over the decade) but still a problem "sometime in the future."

Their analysis is based on some key assumptions:

1. The economy is out of the woods are there will be no recessions in the future
2. Interest rates will not rise
3. The demand for U.S. dollars and debt will stay strong forever

Let's review these assumptions one by one:

1. The economy is out of the woods are there will be no recession in the future

We are already over 5 years into the current cyclical recovery. The average recovery throughout history has lasted 39 months or 3.25 years. We are due for a natural turn down immediately, never mind some point far away in the future.

A recession (or relapse into financial panic) would cause the government to "stimulate" with additional deficit spending while tax receipts fall. The result is the return of trillion dollar annual deficits.

2. Interest rates will not rise

We are currently in the final stages of a global bond bubble. Interest rates on government debt are resting at historical lows going back hundreds of years. This record high price for bonds comes at a time when the fundamentals have never been worse. It is not mathematically possible for the U.S. to pay back what it is currently borrowing without severely devaluing the currency it will pay it back with in the future.

Buying a 30 year bond today at these prices is a guaranteed loss of money.  So why are investors making these purchases? They are not planning on holding the bonds as a 30 year investment, they are planning on "flipping" the bonds to another investor at a higher price in the short term. The same exact psychology took place with the housing bubble back in 2005. It did not matter if the rent payments covered the monthly mortgage on the home, only that there would be a greater fool to step up and pay a higher price next month.

3. The demand for U.S. dollars and debt will stay strong forever

A few months back China and Russia set up the foundation to begin trading through their own currencies (rubles and yuan) to avoid the use of the U.S. dollar. The foundation began construction this week when Russian oil giant Gazprom Neft announced they would begin selling oil for Rubles/Yuan.

The BRIC nations (Brazil, Russia, India, China) sat down this year to begin building a BRIC central bank that would bypass the use of the (US dominated) IMF. The IMF is currently the world's central bank.

These are tiny snowflakes on a mountainside that appear to be nothing as they fall. They are slowly building up pressure on the mountain and there is an avalanche coming in the future. The coming change does not mean the value of the U.S. dollar will fall to zero, but if 95% of world trade is conducted in U.S. dollars and that number falls to 75%, it is going to have a massive impact on the demand for U.S. dollars worldwide.

Ultimately, a percentage of the trillions of U.S. dollars resting on the balance sheets of central banks around the world as a treasure chest of protection against currency devaluations will no longer be needed. For more on why central banks build these reserves and how it will change in the future I would recommend reading The Dollar Trap, one of the year's best books.

When just a small percentage of those trillions are sent back to the U.S. it will unleash the inflation in America that has been building up for years. The problem exists right now at this moment, not some point "in the future." It is only being masked temporarily by the (false) assumptions above. The best case scenario is for an orderly decline in value for the U.S. dollar, not a rush for the exits.

As a side note to make everything I just discussed discussed even more confusing, I am currently bullish on the U.S. dollar in the short term and recommend holding cash positions in liquid rolling short term treasury bills. I only hold this cash while I wait for sell-offs in foreign currency/bond markets. The goal is to continue to diversify out of U.S. dollars when foreign currencies/bonds go on sale.

Wednesday, August 27, 2014

Charting The Parabolic Blow Off Stage Of The U.S. Stock Market

Does it feel like the U.S. stock market no longer corrects downward? That's because it doesn't. Since we entered QE4 (dotted red line below), the size of stock market corrections have ranged from 4% to 5.4% and they are getting smaller as we go.

Prior to QE4, during the initial stages of the current bear market rally, corrections ranged from 8.5% to 19.7%. People were nervous back then. Now, any concerns about the market turning down have completely disappeared. Any down draft is looked at as an incredible buying opportunity. Any rally is looked at as an incredible buying opportunity. This process occurs during the final stage of a cyclical market rally.

Ambrose Evans-Pritchard On How The Next Crisis Will Unfold